Are decumulation products currently fit for purpose, or do we need something new? Could providers replicate advice to help fill the advice gap – and what would it mean for regulation and competition? 

 

Retirement choices are confusing and even scary for most people. Despite this, many are unwilling or unable to get financial advice and instead take the path of least resistance or greatest familiarity. The sheer complexity of pensions and taxation, however, means they risk taking decisions that could lead to much poorer outcomes than they could have had. The Pensions and Lifetime Savings Association estimates that more than 40% of retirees will be relying on their DC savings for a greater proportion of, or their only, income in retirement over time, while median pot sizes will grow significantly in the next 20 years, meaning retirement decisions will become vital for pensioners. 

 

The Financial Conduct Authority’s latest retirement income market data shows that just a third of plans accessed for the first time in 2020/21 were accessed by people who took regulated advice – and this figure is down 3% from the previous year. 

  

 

 

The retirement income data also found that 43% of regular withdrawals were taken out at an annual rate of 8% or more of the pot value, which is likely to exhaust a pot within the lifetime of the account holder, particularly as this drawdown rate is more common with smaller pots.
 

 

  

To improve outcomes, the FCA has mandated investment pathways, a kind of compromise between choice and defaults. Providers must now offer four different investment options to people at retirement, describing these in terms of members’ desired outcome, but the withdrawal question remains unresolved. 

 

 

The current at-retirement market is seen by many as suboptimal for savers. “I feel a frustration that we can do so much for people in the saving phase but when it comes to the hard bit... we’ve done a lot less,” says head of DC platform at master trust Now Pensions, David Bird. 

 

Nearly seven years since the pension freedom reforms, few improvements have been made to really help people with their retirement; one of them is the pathways mandated by the FCA, but Bird feels they are not necessarily pointing people in the right direction. “Pathways [ask], ‘What do you want to do with your money?’ That’s fine, people can choose those options, but really, there should be some steer from us about what people should do with their money,” he says. 

 

Doing so would, not least, avoid large-scale waste of taxpayer money, he suggests: “As a taxpayer we’ve effectively encouraged saving into this vehicle. Why? So people have income in retirement, not for any other reason; not so they can leave inheritance to the next generation, not... so they can [spend it all] in five years.” 

 

 

Greater emphasis on income is what is required, he argues – and crucially, regulatory leeway to do so. Pension funds and providers could then project how much a member can take out of their pension sustainably for the amount they have saved. 

 

The fact that so many make retirement choices without advice means the industry has to find different ways of helping people, he says, rather than 'wag a finger at them’: “The industry always says you should take advice. There is nothing wrong with that, but a lot of people don’t like advisers, don’t trust them, don’t want to pay for it. The response to that is not to keep telling them they should take it – those who want it already do take it probably… we should be more respectful of people who say, ‘I don’t want it’.” 

 

He suggests dividing pension pots into 10-year blocks to turn them into income “so there is always something” available, progressively reducing risk, with warnings about the absence of guarantees. For Bird, income does not need to last a lifetime. “This whole thing that it needs to be income for life is wrong, because we have that; the state pension, which does cover the basic needs of people,” he says. 

 

But to make projections about the use of retirement pots in a safe way, regulators need to be behind it. The view that regulators should allow more personalised recommendations – without these constituting advice – is one that is increasingly being adopted across the industry; the Investing and Saving Alliance says personalisation has become a consumer expectation because their online experience is shaped by it, and the Association of British Insurers has called for regulatory permission to give more personalised options. 

 

Will CDC become the de-facto retirement default? 

 

The decumulation market could also change in coming years if collective defined contribution legislation is extended from single to multi-employer trusts, something the Department for Work and Pensions has said it is looking at. Some in the industry believe CDC could become a valuable post-retirement product, pooling investment and longevity risk while allowing people to take an income, which they say is likely to last a lifetime for most, even if it is not 100% guaranteed to do so. 

 

“A lot of people are working on that at the moment,” says Bird, who calls it “a key innovation which will make a huge difference” and predicts that if it was available, CDC would become widely used at retirement. 

 

There are few other decumulation products that are genuinely new or have the potential to disrupt the market, but master trusts – particularly those run by consultants and insurers – are increasingly active in this space and seeking a competitive advantage by offering flexibility, sophisticated member tools and ESG investments. 

 

 

Among insurers, the focus seems to be on improving the existing retirement experience rather than CDC.  

 

“Where we would expect to see innovation is in helping people decide how much to take out,” says Rob Yuille, head of long-term savings policy at the ABI, noting that there is talk about default arrangements designed to indicate how much to withdraw.  

 

“An example of what could be considered would be withdrawal pathways to match investment pathways, but it’s quite difficult for a provider to know what a suitable income would be for customers,” he says.  

 

The ABI has produced a report which suggests providers could use their own choice architecture for withdrawal decisions, similar to that applied for investment pathways. This could be used by customers in non-advised drawdown or even at a much earlier point in the savings journey.  

 

The report notes that the challenge for providers is to be able to establish the customer’s intention, taking account of more than just their pension, without crossing into advice. “This would need to be supported by a regulatory environment that allows gathering information about customer circumstances to suggest and agree an appropriate withdrawal rate,” it says. 

 

Another way to support pensioners in their withdrawal journeys could be with triggers for when circumstances change. “We talked about having guardrails on withdrawal in drawdown,” says Yuille. These would kick in if there is a fall in the markets, reducing withdrawal, but they too require personalisation. 

 

 

The PLSA wants to see a set of minimum product standards that require schemes to trade off the complex risks faced at retirement, alongside statutory minimum governance standards, in its ‘guided retirement income choices’ framework. This would mean giving access to a range of products “catering for all their needs and defaulting them into a suitable product mix where they do not take active decisions themselves”, says Nigel Peaple, director of policy and advocacy at the PLSA. It could just mean providers simply signposting customers to a suitable set of decumulation products, or it could mean that some firms innovate and offer “new all-in-one blended products”, he says.  

 

Peaple says the PLSA will keep urging government and industry to adopt its guided retirement income choices. “This year, we will continue to do so, especially as we know that the Department for Work and Pensions plans to consult on what should be the right approach to DC decumulation in the spring,” says Peaple, noting that the PLSA will also document where such solutions are already being adopted, along with their impact on savers.  

 

“Importantly, we also seeking information on whether – as we believe - there are legislative or regulatory barriers that need to be removed,” he adds, saying that the PLSA’s calls for a statutory duty on schemes to set standards around communications, governance and product design had the intention to overcome such barriers. 

  

The DWP said a call for evidence on decumulation will be published later this year.